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SPI Management Newsletter 28.04.2023

IMF Warns of Potential House Price Corrections in Europe as Interest Rates Climb

The International Monetary Fund (IMF) has issued a warning of potential "disorderly" house price corrections in Europe as central banks continue to raise interest rates in an effort to curb rising inflation. Some European housing markets are already experiencing a downward correction, and the situation could be exacerbated by further rate hikes. The IMF emphasized that house price declines could have negative consequences on household and bank balance sheets, leading to broader financial instability.

As mortgage rates increase and inflation continues to dent real incomes, house prices have started to decline in numerous markets. Eurostat data revealed a 1.5% drop in EU house prices in Q4 2022, marking the first decline since 2015. The IMF noted that empirical models indicate an overvaluation of 15-20% in most European countries, which could contribute to further price drops.

With inflation set to exceed the European Central Bank's (ECB) 2% target, averaging 5.3% in the eurozone this year and 2.9% next year, further interest rate hikes are anticipated. These hikes will affect mortgage holders' disposable income and, in some cases, their ability to repay their loans. Banks could also face challenges in an environment where mortgage repayments are not being made.

ECB is expected to continue increasing interest rates and maintain them through mid-2024, with a return to the 2% inflation target projected for 2025. The central bank is due to meet next week, with a 50 basis point increase being considered as a possibility. The ECB initiated its rate-hiking path in July 2022, and its main rate currently stands at 3%.

As inflation continues to persist at high levels, the IMF suggests that central banks have no choice but to proceed with further rate hikes. Tight monetary policy is necessary until core inflation is unambiguously on a path back to central bank inflation targets.

US Economy Slows in Q1 Due to High Inflation and Rising Interest Rates

In Q1 2023, the US economy experienced a significant slowdown, primarily due to high inflation and rising interest rates, stoking concerns about a possible recession later in the year. The Commerce Department reported that the inflation- and seasonally-adjusted GDP rose by 1.1% annually from January to March, compared to 2.6% growth in Q4 2022.

Although consumer spending remained strong, driven by higher incomes and accumulated savings, businesses pulled back considerably, leading to reductions in equipment purchases, housing investments, and inventory drawdowns. Many economists anticipate further economic deceleration and a possible recession in the latter half of 2023 as the Federal Reserve continues its efforts to cool the economy and curb inflation.

Both CEOs and consumers have expressed concerns about less favorable economic conditions in the upcoming months, with evidence indicating that the economic slowdown may have started towards the end of 2022.

Big Tech Earnings Drive Best Day for US Stocks Since January

The S&P 500 rose 2% on Thursday, its largest daily gain since January 6, with Microsoft, Apple, Amazon, and Alphabet contributing significantly. Meta emerged as the top performer, surging 14% after reporting better-than-expected Q1 results and highlighting its investments in artificial intelligence. The tech-focused Nasdaq Composite increased by 2.4%.

Meanwhile, US government bonds were pressured by data showing a 1.1% annual GDP growth rate in Q1 2023, down from the 2.6% increase in Q4 2022 and below economists' predictions. However, the labor market demonstrated resilience, with a decrease in new unemployment aid applicants during the week of April 22. Alexandra Wilson-Elizondo of Goldman Sachs Asset Management noted that both optimistic and pessimistic investors could find aspects to support their views in the data. Economic growth is decelerating but has not yet collapsed, according to Andrew Hunter, Deputy Chief US Economist at Capital Economics. He anticipates that higher interest rates and tighter credit conditions resulting from March's banking panic will eventually cause a mild US recession.

Adapted from WSJ, Reuters, CNBC, NYT

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